Should Japan Just Relax?

Last year will be remembered by some as the year China overtook Japan as the world’s second largest economy, even if final GDP stats may indicate this announcement of the inevitable was slightly premature.

Compared to China, Japan’s growth is at best anaemic, and with deflationary pressures, weakening competitiveness and political gridlock, Japan is facing a demographic crunch that could split asunder its social security system amid a towering mountain of public debt. It’s hardly a picture of joy and optimism.

But is the imagery of Japan’s demise ‘greatly exaggerated’? A piece by David Pilling in the Financial Times this week reminds me of that classic sound bite from a British MP visiting Japan as it entered its second lost decade: ‘If this is a recession, I’d like one in my constituency.’

Pilling reels out the standard array of bleak indicators: Japan’s nominal GDP is almost unchanged from 1991; its share of world trade and GDP have more than halved since 1994; and its stock market is still languishing at a quarter of its bubble peak. But he points out that Japan has outperformed the United States, for example, over the past five years on a real per capita basis. Also on the plus side, Japan’s ‘high’ unemployment rate of 5 percent is relatively low by Western standards, the population’s life expectancy is much higher and crime rates are extremely low, with only a fraction of the prison population seen in the United States.

Pilling rightly cautions us from fully embracing the concept of the happy ‘post-growth era’ by pointing out that high suicide rates and government debt are among the factors that don’t sit comfortably with this image of an enlightened model for the rest of the world.

The key point, though, is that economic growth is not the be-all and end-all, and this is even before we take into account issues of environmental sustainability.

All the same, while most people on the planet would probably like to live in the comfort offered by Japan’s society, it would be a mistake for policymakers to think this means they can sit back and relax after all.

Japan’s current predicament may not be half as bad as it’s often made out to be, but another decade of dithering over reforms to address tax, social security and competitiveness issues and even the most optimistic observers will be struggling to portray a rosy picture.